What is the strategic impact of PSD2 ‘Access to account’ (XS2A)?
The payment world as we know it today will definitely change by XS2A. Payers and payees (incl. merchants) will have more options to choose from, because they will be enabled by their banks to connect their bank accounts to third party providers through all sorts of apps. Banks will see that their consumer and commercial business will digitize even faster, while challenges and opportunities can also be expected for the card networks. Interesting times ahead!
If you were a banking leader, what options would you see?
There are numerous strategic options, but this would require thinking beyond regulatory compliance. The preferred options depend on the bank’s (future) value chain position, its strategic ambitions as well as the personal ambition of the banking execs. If I was the head of a leading retail bank, I would like to play the ‘third party’ game myself, because otherwise I would become more disintermediated from my customers. This would in turn further impede future relevance of the bank as a whole. So, I am a proponent of a more ‘pro-active approach’ to deal with the consequences of PSD2 XS2A.
A commercial bank could have a slightly different perspective because the disintermediation has been going on for more than a decade, especially in the ecommerce domain and in particular in e-payments where non-bank payment service providers have established a strong position in enabling online merchants to accept payments. These often sophisticated providers have become regulated under the first PSD (in 2009) as ‘Payment Institutions’ and are moving into other areas as well, such as physical retail payments, FX and cash management. Put simply, these players are challenging incumbent banks in other core services.
In essence, business leaders of more proactive banks would have to consider whether they want to ‘just comply’ and provide access to payments and information, as required by PSD2 XS2A, or extend this towards other services such as digital identities, lending and advanced payment and information features.
Another point of consideration is whether the management of such institutions would like to offer ‘third party’ services themselves and how far they would like to go. One can think of facilitating two sided transactions such as peer-to-peer lending, very similar to what Amazon is doing by helping other merchants and buyers with their trade.
Which persons in banking should be aware of PSD2?
Because PSD2 XS2A has direct impact on the customer domain the short answer is: all key business leaders within a bank should come to agreement on vision, priorities, execution and approach.
PSD2 is not purely about payments. One can limit this to a ‘payment compliance project’, but then I am pretty sure a bank will incur extra cost with limited offsetting revenue streams.
The challenge is carving out new revenue pockets in the area of payment and non-payment, with services that do not exist today, but for which Fintech providers should be willing to pay because they offer value. Think of account information, digital identity attributes, Know Your Customer (KYC) services and payment guarantees. At the same time, the customer will see his money still being safe at their trusted institution, but will be able to manage it through innovative tools and services.
At first sight PSD2 seems to be about payments. However to me PSD2 is a banking wide topic with a transformational impact across banking silos, including marketing, customer service, lending, cards, ACH, commercial banking etc. It does not only impact payment leaders but should have the right attention and commitment from fellow bank leaders and management board.
Why would banks and Fintech players partner?
Simple answer: they need each other in order to accelerate adoption of innovative services and market growth and, as a result, both top and bottom-line growth. Banks provide the trust, reach and scalability, while Fintech providers deliver seamless user experiences driving conversion.
PSD2 forces a ‘marriage’ between the innovative Fintech sector and incumbent financial institutions. Fintech companies can have easier access to payments services and KYC information for account openings. Consumer and business customers can participate much easier than today, when they can leverage their banking relationship when interacting with Fintech providers. Banking brands could and should still be visible. After all, research shows that consumer still trust their banks the most.
Nowadays we see more and more large banking group partnering with Fintech players and setting up incubators and accelerators. In this respect two interesting publications appeared recently, ‘the Fintech 2.0 manifesto’ (a.o. Santander, Anthemis, Oliver Wyman) and the ‘Opinion Paper on Digital Customer Services Interface’ by the European Banking Association. Both advocate this cooperation and include an industry wide ‘call to action’.
What do you see happening in the coming twelve months?
Now with the informal agreement on the PSD2 text, we can expect a European parliament vote after summer (in September most likely). In the ‘happy flow’ this means that the European Banking Authority (red: EBA) will start working on their Regulatory Technical Standards (red: RTS) from that moment onwards.
The RTS have nothing to do with what payment professionals mean with ‘technical’. The RTS are likely to be more of a rule and principle based nature. I am finding it rather difficult to imagine what these RTS could be, because it is not trivial to write something, which is scope complete in terms of functionality, technology, legal considerations and operations. In addition, something that is implementable and workable in 28 EU member states.
Ideally EBA comes up with principles and guidance for market actors in order to make XS2A happen. So that the industry gets mobilized properly, bank and non-bank players figuring this out. The technology is there. The key debate will be the authentication part and how the consumer can authorize third parties to access their account and accompanying data. In fact, this is a typical digital identity challenge.
The PSD2 is expected to be approved by the Parliament in September 2015. This would indicate that PSD2 will be published between October and December 2015 in the Official Journal of the European Union. The EU Member States will then have 24 months to implement PSD2 into their national legislation by a set date between October and December 2017.
When the PSD2 enters into force the EBA will have 12 months to develop its RTS. Then the RTS have to be approved by the commission and parliament (in a 3-5 months review period), after which the RTS can be transposed into national law. Once the RTS are approved and adopted, relevant market actors will have an 18 months period to finalize their implementations. In all, realization of PSD2 XS2A will take up to 42 months. This does not mean, however, that banks can rest on their laurels. Thinking of resilient distribution and operating models to compete in the digital era should start today!
About Douwe Lycklama
Douwe Lycklama is founding partner of Innopay. Douwe is one of the thought leaders in ‘networked services’ like e-payments, e-invoicing, e-identity, m-payments, cards and SEPA, shaping breakthrough business and market innovations, standards and schemes. Innopay works for major international financial institutions and corporates, developing products, businesses and strategies. Innopay is member of EPCA, EBA and ECP/EPN.
About Innopay
Innopay is an independent management consultancy firm specialised in digital strategy and transformation. For businesses it is a challenge to stay relevant in the increasing digital world. We help clients by providing strategies and solutions in the field of digital identity, online payments, ecommerce, digital innovation and e-business. Read more articles on the websites blog section.
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